Rodney Cooper: Bullish on Iron Ore and Copper
Source: Brian Sylvester of
The Gold Report
Rodney Cooper, a senior mining analyst with Dundee Capital
Markets in Toronto, has some rather bullish forecasts for iron ore
and copper prices. But given the worldwide economic malaise and a
slowdown for China's economic powerhouse, what's his rationale?
Cooper talks about his predictions in this exclusive interview
The Gold Report.
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The Gold Report:
Dundee Capital Markets recently revised its commodity prices, most
of which are forecast to go higher. Dundee has a long-term gold
price of $1,125/ounce (oz.) for beyond 2015. While that is up 5%
from previous projections, what in gold fundamentals leads Dundee
to such a bearish forecast?
We review our metal prices quarterly. We increased our 2012 price
by 11% to $1,750/oz. Today, gold is at $1,763/oz., so I would say
that that's a reasonable view. For long-term pricing of gold and
silver, our team reviews the 36-month trailing average prices. That
methodology is endorsed by the Securities and Exchange Commission
for mining companies to estimate resources and reserves.
With base metals and iron ore, we review the marketplace for the
marginal cost of production for the commodity. We typically set our
long-term pricing with some reference to that marginal cost.
Quarter-by-quarter and year-by-year, that marginal cost can change.
In recent history, that marginal cost has been creeping
Dundee pushed up its price for iron ore by 24%, to $182/ton,
in 2011. From 2012-2016, the average annual increase is about 35%
each year. What are the catalysts behind that increase given that
the economic outlook is fairly bleak and China's economy is cooling
I first got heavily involved in iron ore back in 2006 as
chief operating officer for Baffinland Iron Mines-a baptism by fire
into the iron ore space. Back in 2006, and ever since then, there
has been a sense that the growth in steel demand has been
relatively strong. Demand growth is moderating; nevertheless,
demand growth is a reality in the marketplace. Industry observers
have said, "Well, you know, there's a lot of supply coming on." We
are finding that there are a lot of projects on the books, but the
capacity of the mining companies to actually deliver on this new
supply seems to be restrained.
My revisions to the iron-ore forecast in the near term reflected
where the market has gone this year. Year-to-date, it is sitting at
about $183/ton. My forecast is now at $182/ton. My long-term price,
going out to 2018 or 2019, is down to $90/ton-half of where we are
I expect to see the marginal costs remain high. The marginal
cost producers are in China. I expect to see prices eventually
moderate because of new supply, but the timing for that new supply
gets pushed out further and further each year as the news flow
comes in and we hear about projects that are delayed or
Peter Hopely, a steel analyst with UBS Securities, produced a
chart that has demand outstripping supply right now, but supply
outstripping demand by 2014. Do you agree with that forecast?
I absolutely agree that supply will catch up to demand. When
I first started in iron ore in 2006, everyone was predicting that
would happen in 2012. Now there are some forecasts that it will be
2014 or 2015. I'm forecasting that it will take a little bit longer
for that to occur.
We've seen some capacity constraints. For example, there are
infrastructure development constraints in Western
Most of the new projects are being sponsored by the large
seaborne players in iron ore, such as
Rio Tinto (NYSE:RIO; ASX:RIO)
BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF)
Vale S.A. (
. These companies have seen their levels of relative debt come way
down. They have very strong balance sheets. They're flush with
cash. These are all organizations with a great deal of capacity and
ability to develop new projects, if they don't have interference
from governments and circumstances beyond their control. I'm not
going to bet against the large companies bringing the supply on
eventually-but the point is
We will start seeing that gap, but I'm estimating a little bit
further out in time.
What is China's role in all of this?
China is the driver for a whole variety of commodities.
Chinese imports of seaborne iron ore are probably the most
important driver in the iron-ore market. In the first half of this
year, imports of iron ore into China increased 8% despite all the
talk about the marketplace moderating. Levels of activity are still
Steel output in China is 1.9 million tons (Mt.)/day, which is
huge compared to an average 1.7 Mt./day last year. As countries
urbanize, the intensity of steel production grows. In countries
such as South Korea or Taiwan, the intensity of steel use is triple
the intensity of steel use in China. Urbanization is at 80% of the
population in some of those industrialized countries where China is
only at 40%. Looking forward, we see literally hundreds of millions
of Chinese moving into urban centers.
I absolutely buy into the recent economic outlooks that forecast
that Chinese growth is moderating. While there will not be
double-digit growth anymore, there will still be about 8%
Looking forward just three or four years, Chinese imports of
seaborne iron ore are expected to grow 20%, which would add an
additional 200 Mt. of iron ore that has to be delivered into the
Chinese marketplace. Layer on top of that coal and other
ingredients required for making steel and there could be huge
demand growth in seaborne requirements. In fact, just recently Vale
sponsored a $4 billion (
) investment in Chinamax vessels. It is building about 35
400,000-ton vessels to ship iron ore from Brazil to China. That's
very tangible evidence of the growth in seaborne trade into
Are Chinese companies going to get into the mining game to
the point where they're competing directly with major players like
There is a certain level of domestic Chinese iron-ore
production, which represents about one-fifth of consumption. The
Chinese government is trying to reduce the number of polluting,
energy-inefficient operations. They are closing coal mines and
small iron-ore mines and requiring many regional operations to
I've looked at iron-ore projects in China where the company is
actually producing a profit from ore that is grading less than 10%
iron. Outside of China, this is virtually unheard of. Those are the
kinds of operations that are dropping away. In fact, we don't see
any growth in domestic Chinese production of iron ore simply
because there are so many of these small, inefficient operations
that are falling by the wayside. As demand grows, the need for
additional seaborne iron-ore increases.
The new target prices for some of the names you cover are
surprising. The biggest jump belonged to
Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF)
, which has the Kami iron-ore project in the Labrador Trough, an
area known to hold large iron-ore deposits. Alderon jumped an
impressive 20%, which means the junior is very sensitive to
Companies that have undeveloped assets and are planning to be
into production in three to four years are very highly leveraged to
the longer-term price of iron ore. Alderon is certainly my top pick
in the iron-ore space in Canada now.
This is a great company. It is staffed by iron-ore veterans from
Rio Tinto, Iron Ore Company of Canada and Consolidated Thompson
Iron Mines Ltd. (
). These are people who have the capacity and experience to help
build a mine and operate a mine.
In general, I am not a keen investor in many of these junior
stories. So many of the junior stories may have reasonable
resources delineated, but they are talking billions of dollars and
a decade to get into production. Railways and ports have to be
built. Most junior iron-ore stories are going to struggle. If you
buy into this thesis that supply is going to overtake demand and
prices are going to drop, many of these mega-projects in the hands
of juniors are just never going to make it. They're just not going
to be there in time.
Alderon, in contrast, has the use of a public domain railway,
the Québec North Shore and Labrador Railway. It has the Port of
Sept-Iles facilities at Point Noire. Here's a junior with a
high-quality asset that can build a mine for less than $1B in four
years or so. It doesn't have to build railways or ports. The
simplicity of the project is the relatively low cost and being
relatively quick into the marketplace. That is going to make all
the difference in the world between the juniors that make it and
the juniors that just don't quite make it. So, we love Alderon.
Do you think it's likely it will get offtake agreements and
build partnerships? Or do you think it gets taken out before
Anything is possible. There is a lot of merger and
acquisition activity in iron ore.
Cliffs Natural Resources Inc. (
did acquire Consolidated Thompson, but only after it built a
mine and took a lot of the risk out of the story. That could easily
happen. Other major players in the Labrador Trough would be less
likely to go after Alderon, but it would be a complementary asset
I think what really distinguishes Alderon is that the management
team is fully capable of building and operating this mine. It's not
simply a junior group of geologists building a resource and trying
to flip it to someone in a sale. These guys are the real deal who
can actually make the mine happen.
Building a mine and starting to sell product is where the
shareholder gets the tremendous uplift in value beyond simply
defining a resource and selling it at a small premium. Alderon is
going to have fantastic news flow for the rest of the
year-resources in September, preliminary economic assessment,
discussions with offtakers and the permitting process. That helps
to drive and support my target price of $6.
What are some other plays in iron ore that Dundee is bullish
One that I'm very excited about is
African Minerals Ltd. (LSE:AMI)
. The company is currently trading around CAD$10 and I've got a
CAD$22 target price within the next 12 months. It has a 12 billion
ton deposit in Sierra Leone. The first phase of developing this
Tonkolili Mine is a $1.4B investment that is largely complete now.
We're expecting the first ore to be put on the train next month and
the first ore on a ship to the Chinese marketplace in the fourth
quarter. There should be a tremendous uplift in value going into
the end of the year.
Beyond that, African Minerals has got a $2B expansion adding 23
Mt./year of production over the next two years. That $2B is already
largely financed. The company has just announced a deal with
Shandong Metals & Minerals Corp., the large Chinese steel
producer, to invest $1.5B in the venture for 25% interest. That
represents a 100% premium over the current share price. We're just
waiting for the Chinese government to finally endorse that
arrangement before the end of the year.
The capital for phase three will come from organic cash flow
from phases one and two. Looking out five years, African Minerals
will have a production rate approaching 70 Mt./year and step onto
the stage as one of the top five iron-ore producers in the world.
It is a great name to follow for people that are ready, willing and
able to invest in the London market and in Africa.
Are you concerned about the project being located in Sierra
Sierra Leone has come a long way from the days of blood
diamonds. This is a democratically elected government with its
second president now. It is a former British colony. Tony Blair
grew up there. There are truth and reconciliation commissions and a
lot of transparency in what is going on there.
I've been to Sierra Leone several times. You don't see any guns
or soldiers. You see Chinese construction workers. Sierra Leone has
got a stigma attached to it, but in the last five years it has
moved beyond that overhang. There are Sierra Leone peacekeepers now
trained by the British who are in Darfur. Sierra Leone is a country
that is surprisingly low in political risk.
This project could also be such an important economic step that
the entire country is behind it. It has the potential to really be
a game changer in the economic development of Sierra
Let's move on to copper. Dundee also raised its price
projects for the red metal, albeit only by 8% in 2011. But then it
gets interesting. The revised price projections for copper jump an
average of 25% from 2013-2015. What is driving those increases?
We look at marginal cost of production. Year-to-date copper
is at $4.26/pound (lb.), but we're forecasting $4/lb. next year and
$2.50/lb. over the long term. We're dialed into the current
reality. Much like iron ore, the Chinese are driving the demand for
copper. We are expecting copper fundamentals to be favorable in the
near term. There were deficits in supply last year and this year.
Moving forward, we think that the marginal cost of production is
somewhere around $2.50/lb. As time goes on, we may see a
The fundamentals for copper out a few years are exceptionally
strong. Regardless of what level of future demand growth you
project for China, the industry is running out of projects to fill
the supply pipeline. This is going to be a fundamental realignment
of the copper industry. We have gone to a new plateau and we are
all accepting that as the new reality. In a few years, as cost
pressures continue, we may very well see a rerating of copper
prices up to a new plateau beyond where it is sitting
In the meantime, Dundee is sitting fairly conservatively with a
$2.50/lb. long-term price representing the marginal cost of
production. That's pretty much in line with many analysts and
market commentators. But I do think that there could be a long-term
price rise-and it could perhaps rise dramatically.
The biggest jumps in your target prices were for
Hana Mining Ltd. (TSX.V:HMG)
Western Copper Corp. (
, both of which jumped by 11%. Please tell us about those
Over the last year, I began covering seven junior copper-moly
stories. So far, four of my seven picks have been acquired by
larger companies. What's left is Western Copper,
Candente Copper Corp. (TSX:DNT)
and Hana Mining. They all have high quality, undeveloped
copper-gold or copper-moly assets. I fully expect that all three of
these companies will be acquisition targets over the next
Western Copper has the Casino asset in the Yukon-24 billion
pounds (Blb.) of copper. Candente Copper is about half that size in
Northern Peru. Hana Mining has about 7 Blb. in Botswana in a new
copper belt that's emerging there, as well as silver. All of them
are in reasonable political jurisdictions and any one of them could
fall on the radar screen of the big mining companies going
Do you have some final thoughts?
Iron ore and copper are the two commodities that I highly
favor at the moment. I'm constantly on the lookout for relatively
early stage stories that have attributes that would lead them to
capital appreciation and to put companies into an acquisition
dynamic with bigger companies. In the last year, I have had seven
of my names acquired, so I'm doing a reasonable job at picking the
ones that are attractive to the big companies.
That's great. Thanks.
is a professional mining engineer with nearly 30 years of
varied international experience in corporate development,
engineering and operations. Prior to joining Dundee Securities as
senior analyst in the base metals and iron ore areas in November
2009, he was chief operating officer for Baffinland Iron Mines,
the owner of the Mary River project in Canada's Arctic region.
Prior to Baffinland, Rod was vice president, technical services
for Kinross Gold Corporation. He has also worked for Homestake
Canada, Echo Bay Mines, Inco Metals and the TD Bank. He graduated
with a degree in mining engineering (Honors) from Queen's
University in 1980, and with a Master's degree in business
administration from the University of Toronto in 1984.
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1) Brian Sylvester of
The Gold Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Gold Report:
Alderon Resource Corp.
3) Rodney Cooper: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I personally
and/or my family am paid by the following companies mentioned in
this interview: None.
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